GST evasion by winning bidders: Rly purchases since July '17 face enquiry

 The Directorate General of Goods and Services Tax (GST) Intelligence (DGGI) has initiated an investigation into tenders awarded by the Indian Railways since July 2017 to crack down on instances of misclassification of rail supplies by bidders who have been charged with evading taxes.

This follows requests by two government departments, the Central Board of Indirect Taxes and Customs (CBIC) and the Department for Promotion of Industry and Internal Trade (DPIIT), to the Railways for quoting GST rate of goods to be procured in the tender notices floated by offices of the national transporter.

To crack the whip on bidders allegedly indulging in the malpractice by quoting low GST rate to win bids and evade GST, the DGGI enquiry is aimed at obtaining details of all tenders and procurement done by the Railways after July 2017, where bids were received under Chapter 86 and Chapter 84 of the GST tariff.

Chapter 86 includes rail or tramway locomotives, rolling-stock, and parts; rail or tramway track fixtures, fittings, and parts; mechanical traffic signalling equipment that attracted 5 per cent tax up to August 2019. GST rate on these items was later hiked to 12 per cent.

Chapter 84 includes goods such as nuclear reactors, boilers, machinery, mechanical appliances, and parts taxed at 18 per cent.

Necessary action will be taken by the investigation arm of the CBIC if the enquiry reveals misclassification of supplies made to the Railways, said sources familiar with the development.

The move by the investigation body comes against the backdrop of communication by the two departments, DPIIT and CBIC, to the Railway Board Chairman to quote the correct GST rate in the notice inviting tenders after allegations were made by one of the bidders — Bharat Forge — on denial of a level playing field to all participants, and the winning bidder wrongly classifying goods at low tax slab to gain arbitrage over the others.

While the DPIIT, finance ministry, and Bharat Forge did not respond to emails seeking comment, the Railways said that the GST law states registered taxpayers need to self-assess their tax liability, and classification of goods cannot be done by the Railways.

The ministry has also filed a special leave petition with the SC against an Allahabad HC order on the issue, according to the legal opinion of the Additional Solicitor General.

Bharat Forge, in 2019, had complained to the DPIIT that in the tender for procurement of ‘turbo wheel impeller balance assembly’, the successful bidder deliberately quoted low GST of 5 per cent instead of 18 per cent, leading to ‘GST revenue loss’ and ‘undue price advantage of 13 per cent to the bidder’.

GST rates are to be added by the bidder to arrive at the total value of procurement. This quoting of low GST rates became a practice, and the CBIC has received many complaints on ‘malpractice’ by bidders in providing supplies to the Railways.

The practice being followed is to deliberately classify procurement products under Chapter 86 of the GST tariff that attracts a lower tax rate of 5 per cent, against classifying such products under Chapter 84 that attracts 18 per cent GST.

“Since there is a possible overlap between Chapter 84 and Chapter 86, there is a deliberate tendency of unscrupulous elements to misclassify Chapter 84 goods under Chapter 86 to garner unfair competitive advantage, and evade tax in the process,” said another internal correspondence between the government departments accessed by Business Standard.

Bharat Forge — after complaining to the DPIIT and finding no recourse — had moved the Allahabad HC seeking direction be issued to the Railways for clarifying if procurement of the ‘turbo wheel impeller balance assembly’ is to be taxed at 18 per cent, so as to ensure uniform bidding and a level playing field for all participants.

The Railways in the counter affidavit did not clarify the correct harmonised system of nomenclature (HSN) code — used for systematic classification of items — or GST rate of the product, and “is trying to shift its responsibility by saying the levy of tax and imposition of penalty for misclassification of HSN code is an area of concern of the tax authorities”, the court had observed.

“According to the ruling, in order to determine the correct HSN code and applicable GST rate, reference could be required to be made to the tax authorities by the Railways. Since there are a large number and variety of tenders, the possibility of referring to tax authorities by the Railways might not be practical,” the Railways said in response to queries.

“...the occasion of misclassification arose as a result and also reluctance by the Indian Railways to mention HSN code of the goods being sought to be procured,” the correspondence said.

Misclassification of supplies to the Railway is ‘fairly widespread after GST’, and only a few detections have been made by the CBIC, said the internal communication.

In its response to Business Standard’s queries, the Railways said, “In the past, according to their request, GST authorities have been provided the data on tax rates quoted in the rail tenders for taking action against unscrupulous vendors. GST-enforcing authorities are equipped to deal (with) misclassification of the HSN code. In many cases in the recent past, firms have been penalised by GST-enforcing authorities for not billing the material in the correct HSN code.”

The Allahabad HC had directed the Railways if the GST value is to be added to arrive at the total price for procurement of products in a tender, the tender committee should clarify the issue with the GST authorities relating to the applicability of the correct HSN code, and mention the same in the bid document to ensure uniform bidding from all participants and to provide all bidders a level playing field’.

Besides investigating previous tenders awarded since 2017, the CBIC’s GST policy wing is evaluating the legal feasibility of making it compulsory for the recipient or purchaser to mention the HSN code of goods or services being procured in business-to-business transactions. This is being done after the ruling of Allahabad HC mentioning HSN code in the tender document shall resolve all disputes relating to fairness and transparency in the process of selection of the bidder.

SOURCE.https://www.business-standard.com/article/indian-railways/gst-evasion-by-winning-bidders-rly-purchases-since-july-17-face-enquiry-121041900026_1.html